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on Dynamic General Equilibrium |
| By: | Paul De Grauwe (Catholic University of Leuven (KUL) - Department of Economics, B-3000 Leuven, Belgium.) |
| Abstract: | DSGE-models have become important tools of analysis not only in academia but increasingly in the board rooms of central banks. The success of these models has much to do with the coherence of the intellectual framework it provides. The limitations of these models come from the fact that they make very strong assumptions about the cognitive abilities of agents in understanding the underlying model. In this paper we relax this strong assumption. We develop a stylized DSGE-model in which individuals use simple rules of thumb (heuristics) to forecast the future inflation and output gap. We compare this model with the rational expectations version of the same underlying model. We find that the dynamics predicted by the heuristic model differs from the rational expectations version in some important respects, in particular in their capacity to produce endogenous economic cycles. JEL Classification: E10, E32, D83. |
| Keywords: | DSGE-model, imperfect information, heuristics, animal spirits. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080897&r=dge |
| By: | Kazuo Nishimura (Kyoto University - Kyoto University); Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | In this paper we consider a Ramsey-type aggregate model with general preferences and technology, endogenous labor and factor-specific<br />productive external effects arising from average capital and labor. First, we show that indeterminacy cannot arise when there are only<br />capital externalities but that it does when there are only labor external effects. Second, we prove that only the additively-separable and linear homogeneous specifications for the utility function allow to get local indeterminacy under small externalities and plausible restrictions on the main parameters. Third, we show that the existence of sunspot fluctuations is intimately related to the occurrence of periodic cycles through a Hopf bifurcation. |
| Keywords: | Indeterminacy, endogenous cycles, infinite-horizon model,<br />endogenous labor supply, capital and labor externalities |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00281428_v1&r=dge |
| By: | Christian Ghiglino (Department of Economics, University of Essex - University of Essex); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | We explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and preferences generate non linear absolute risk tolerance indices, a rise in the Gini index may only be associated to a rise in volatility.<br />When individual preferences are such that the individual absolute risk tolerance indices are linear, as with HARA utility, even a low level of taste heterogeneity ensures that a rise in inequality may not reduce volatility, and this independently of the wealth distribution.<br />Finally, we note that such a clear result is at odd with the existing related literature. |
| Keywords: | Wealth Inequality, Pareto distribution, Gini index, Elastic Labor Supply, Macroeconomic Volatility, Endogenous Equilibrium Business Cycles. |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00281379_v1&r=dge |
| By: | Ebell, Monique (Department of Economics and Business Studies, Humboldt University of Berlin, and Centre for Economic Performance, London School of Economics and Political Science); Haefke, Christian (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Instituto de Análisis Económico, CSIC) |
| Abstract: | We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matching model with monopolistic competition in the goods market and individual bargaining. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980’s and 1990’s could be directly attributed to product market deregulation. Under a traditional calibration, our results suggest that a decrease of less than two-tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount. Under a small surplus calibration, however, product market deregulation can account for the entire decline in US trend unemployment over the 1980’s and 1990’s.; |
| Keywords: | Product market competition, barriers to entry, wage bargaining |
| JEL: | E24 J63 O00 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:223&r=dge |
| By: | Aleksander Berentsen; Christopher Waller |
| Abstract: | When agents are liquidity constrained, two options exist — borrow or sell assets. We compare the welfare properties of these options in two economies: in one, agents can borrow (issue inside bonds) and in the other they can sell government bonds (outside bonds). All transactions are voluntary, implying no taxation or forced redemption of private debt. We show that any allocation in the economy with inside bonds can be replicated in the economy with outside bonds and that the converse is not true. Moreover, under best policies, the allocation with outside bonds strictly Pareto dominates the allocation with inside bonds. |
| Keywords: | Liquidity, Financial markets, Monetary policy, Search |
| JEL: | E4 E5 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:372&r=dge |
| By: | Christian Ghiglino; Alain Venditti |
| Abstract: | We explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and preferences generate non-linear absolute risk tolerance indices, a rise in the Gini index may only be associated to a rise in volatility. When individual preferences are such that the individual absolute risk tolerance indices are linear, as with HARA utility, even a low level of taste heterogeneity ensures that a rise in inequality may not reduce volatility, and this independently of the wealth distribution. Finally, we note that such a clear result is at odd with the existing related literature. |
| Date: | 2008–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:653&r=dge |
| By: | Albert Marcet; Elisa Faraglia; Andrew Scott |
| Abstract: | A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these simulations we find no presumption that governments should issue long term debt ? policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc.. Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights. |
| Keywords: | Complete Markets, Debt Management, Government Debt, Maturity Structure, Yield Curve |
| JEL: | E43 E62 |
| Date: | 2008–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:743.08&r=dge |
| By: | Haan, Peter (DIW Berlin); Prowse, Victoria L. (University of Oxford); Uhlendorff, Arne (IZA) |
| Abstract: | In this paper we develop a dynamic structural life-cycle model of labor supply behavior which fully accounts for the effect of income tax and transfers on labor supply incentives. Additionally, the model recognizes the demand side driven rationing risk that might prevent individuals from realizing their optimal labor supply state, resulting in involuntary unemployment. We use this framework to study the employment effects of transforming a traditional welfare state, as is currently in place in Germany, towards a more Anglo-American system in which a large proportion of transfers are paid to the working poor. |
| Keywords: | life-cycle labor supply, involuntary unemployment, in-work credits |
| JEL: | J22 J64 C35 C61 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3480&r=dge |
| By: | Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthias Mohr (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (Directorate General International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we examine the macroeconomic effects of alternative fiscal consolidation policies in the New Area-Wide Model (NAWM), a two-country open-economy model of the euro area developed at the European Central Bank (cf. Coenen et al., 2007). We model fiscal consolidation as a permanent reduction in the targeted government debt-to-output ratio and analyse both expenditure and revenue-based policies that are implemented by means of simple fiscal feedback rules. We find that fiscal consolidation has positive long-run effects on key macroeconomic aggregates such as output and consumption, notably when the resulting improvement in the budgetary position is used to lower distortionary taxes. At the same time, fiscal consolidation gives rise to noticeable short-run adjustment costs in contrast to what the literature on expansionary fiscal consolidations suggests. Moreover, depending on the fiscal instrument used, fiscal consolidation may have pronounced distributional effects. JEL Classification: E32, E62. |
| Keywords: | DSGE modelling, limited asset-market participation, fiscal policy, fiscal consolidation, euro area. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080902&r=dge |
| By: | Yurko, Anna |
| Abstract: | This paper studies the relationship between consumer incomes and ages of the durable goods consumed. At the household level, it presents evidence from the Consumer Expenditure Survey of a negative correlation between incomes and ages of the vehicles owned. At the aggregate level, it constructs a dynamic, heterogeneous agents, discrete choice model, to study the relationship between the distribution of consumer incomes and the distribution of vehicle vintages. The model's parameters are calibrated to match vehicle ownership data for 2001. The moments of the income distribution are then varied to generate predictions for mean and median ages of vehicles. The model predicts that higher levels of income inequality lead to older vehicle stocks. If the initial incomes are low, increasing mean income may lead to the aging of vehicles by encouraging entry of lower income consumers into vehicle ownership via purchases of older vehicles. Beyond a certain income level, however, economies with higher mean incomes have younger vehicle stocks. |
| Keywords: | income distribution; motor vehicles; heterogeneous agents models; intertemporal consumer choice; discrete choice |
| JEL: | D12 D91 E21 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8849&r=dge |
| By: | NUTAHARA Kengo; INABA Masaru |
| Abstract: | Equivalence results in business cycle accounting imply that the prototype model with time-varying wedges can achieve the same allocation generated by a large class of frictional detailed models. Conventionally, the process of wedges is specified to be the first order vector autoregressive. In this paper, we characterize the class of models covered by the prototype model under the conventional specification and find that it is much smaller than that believed in previous literature. We also provide an alternative specification in order to let the prototype model cover a much larger class. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08015&r=dge |
| By: | Jaime Alonso-Carrera; Maria Jesus Freire-Seren; Baltasar Manzano |
| Abstract: | This paper proposes a multi-regional, general equilibrium model with capital accumulation to analyze the economic impact of the spatial distribution of public capital formation. This model is calibrated and solved by using data for the Spanish economy in order to simulate some comparative dynamic exercises of fiscal policy changes. These analyses illustrate the role that public investment plays in generating the existing imbalances in regional development. This is done by computing the spillover effects and the opportunity costs of regional distribution of public investment. Finally, two rankings of regional priorities in public investment can be derived: one based on the criterion of reducing regional disparities, and other based of an efficiency criterion. |
| JEL: | E62 H20 O40 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-09&r=dge |
| By: | David De La Croix (CORE - Department of Economics - Université Catholique de Louvain); Clara Delavallade (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | Corruption is thought to prevent poor countries from catching up with richer ones. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distorsion, we propose a dynamic model where households vote for the composition of public spending, subject to an incentive constraint reflecting individuals' choice between productive activity and rent-seeking. In equilibrium, the structure of public investment is determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption but the possibility of corruption still distorts the allocation of public investment. We test the implications of the model on a set of countries using a two-stage least squares estimation. We find that developing countries with high predatory technology invest more in housing and physical capital in comparison with health and education. The reverse is true for developed countries. |
| Keywords: | Public investment, optimal growth, corruption, political power. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00129741_v2&r=dge |